US Employment Report: Glass Half Empty or Half Full?

The headline payrolls number was weak, but the revisions almost made up for it and the farcical unemployment rate dropped again. All in all a nice test of sentiment strength here due to the data’s inconclusiveness.

The nonfarm payrolls number confirmed the weakness in the ADP number from earlier this week, almost matching that survey’s 119k number and falling some 45k short of expectations, though the March data was revised up +34k and the private payrolls data showed a slightly smaller -35k surprise and larger +45k revision to the March data.

Through the magic of the rapidly shrinking work force, the overall unemployment rate dropped to 8.1% even as the household survey showed a -169k reading. (Anyone looking at this table month after month will quickly realize that month to month fluctuations in the US employment data are impossible to discern).

All in all, this was only a slightly negative US employment report, which makes the USD look a bit weaker against the currencies where central banks that appear to be moving away from easing (BoE and ECB, though the former has been way overplayed, I’m guessing – let’s see what King and company have to say next week) while it is strong against the pro-risk currencies where economic expectations are unwinding rapidly and where the currencies suffer in a risk-off environment.

More weak European data
In Europe today, the services PMI’s, particularly from the periphery, paint a picture of misery similar to the recently auctioned Edvard Munch painting, The Scream. Spain and Italy were in the 42’s while Germany continues to expand moderately, a further cranking wider of the two-speed Europe problem. Ironically, bond spreads at the periphery were not any wider today.

Looking ahead
It appears that the market is trying to play today’s US employment report as slightly moving forward the prospects of QE3 if we have a look at the reaction in gold and treasuries and the EURUSD. But the overall risk off reaction to the data suggests that the market may be realizing that it must take its punishment first before another round of easing is served up by Helicopter Ben.

The key event is this weekend’s French election, as it appears Hollande is set to take the victory and assume the office of president already at mid-month. The critical thing going forward is the degree to which he can make his campaign platform a reality or whether the assumption of office causes the common shift to a more conservative stance: here’s a good recent Reuters article covering what Hollande believes in and what he might bring. It’s less alarmist than one might read elsewhere.

USD Hat-trick vs. Commodity Dollars
While EURUSD is endless confused about what to do because we have the market warming up to QE3 here less than an hour after the US employment report, while the ECB is clearly wants to stay passive for now. But elsewhere, the worries over China and the collapsing interest rate spreads and oil prices are pushing the commodity currencies lower versus the greenback today. USDCAD is above 0.9900 as of this writing and may be headed higher still as this was a key line of resistance and as oil prices are off more than five dollars a barrel in the space of a few days.

Chart: AUDUSD
Yesterday it was NZUSD breaking a big support area and today it is AUDUSD, which broke to new multi-month lows below 1.0230 after the US data. This potentially opens up a test of parity and beyond if we remain at new lows to close the week.

Be careful out there.

Economic Data Highlights

• China Apr. HSBC Services PMI out at 54.1 vs. 53.3 in Mar.
• Spain Apr. Services PMI out at 42.1 vs. 45.4 expected and 46.3 in Mar.
• Switzerland Mar. Retail Sales out at +4.2% YoY vs. +1.1% expected and vs. +0.8% in Feb.
• Italy Apr. Services PMI out at 42.3 vs. 43.7 expected and 44.3 in Mar.
• Germany Apr. Final Services PMI adjusted lower to 52.2 vs. preliminary 52.6 and vs. 52.1 in Mar.
• Euro Zone Apr. Final Services PMI adjusted lower to 46.7 vs. preliminary 47.9 and vs. 49.2 in Mar.
• Euro Zone Mar. Retail Sales out at +0.3% MoM and -0.2% YoY vs. 0.0%/-1.1% expected, respectively and vs. -2.1% YoY in Feb.
• US Apr. Change in Nonfarm Payrolls out at +115k vs. 160k expected and +154k in Mar.
• US Change in Private Payrolls out at +130k vs. +165k expected and +166k in Mar.
• US Apr. Unemployment Rate out at 8.1% vs. 8.2% expected and vs. 8.2% in Mar.
• US Apr. Average Hourly Earnings out at 0.0% MoM and +1.8% YoY vs. +0.2%/+2.0% expected, respectively and vs. +2.0% YoY in Mar.
• US Apr. Average Weekly Hours out unchanged at 34.5 as expected

Upcoming Economic Calendar Highlights (all times GMT)

• Canada Apr. Ivey PMI (1400)
• US Fed’s Williams to Speak (1525
• US Fed’s Evans to Speak (1530)
• Australia Apr. AiG Performance of Construction Index (Sun 2330)
• Australia Apr. NAB Business Conditions (Mon 0130)
• Australia Mar. Retail Sales (Mon 0130)
• Australia Mar. Building Approvals (Mon 0130)